How to Make the Most of Your Required Minimum Distributions

Now that we have discussed the basics of Required Minimum Distributions (RMD) in The ABCs of RMDs, it’s important to see how you can get the most from your money. RMDs may be a mandate, but that does not mean there isn’t room for flexibility when it comes to tax planning. As discussed in the previous blog, the most important strategy of all is to simply take your RMD timely. Failing to act will result in a penalty of 50% of the RMD.

Roth IRA Conversion Benefits

Depending on your situation, one strategy to consider is avoiding required minimum distributions altogether by converting your retirement account to a Roth IRA. You may be able to eliminate the obligation of RMDs during your lifetime and all of the growth in the account will be earned tax free. One benefit to this strategy is that you will reduce your adjusted gross income (AGI) for future taxable years, which could possibly lower your tax rates. The downfall to this strategy is that you must have the cash flow to be able to pay the taxes owed on the amount rolled over. Partial rollovers to reduce your annual RMD could also be beneficial by the same logic if cash flow is an issue.

There are many other factors to consider when analyzing a Roth conversion, and as with anything in this blog post, it is best to consult with your tax advisor prior to rolling over any funds. If a Roth IRA conversion is not for you, there are other options you may want to explore. Taxpayers with multiple traditional IRA accounts must compute their RMD based on the balance of each account individually but they have the option to draw the total RMD from only one of the multiple accounts. Having the flexibility to choose which account you draw from could be beneficial to taxpayers who have contributed both nondeductible and deductible contributions to IRAs over their lifetime. An option which currently has expired as of December 31, 2013 but it may be renewed during 2014, is to send your RMD directly to a qualified charitable organization. While you will not be able to pick up a charitable deduction for this contribution, you will be able to exclude your RMD from your income, thus lowering your AGI and tax liability. As you can see, there are many tax planning options when it comes to RMD but more importantly, there are many factors that should be carefully analyzed annually to determine the best strategy for distributing RMDs.